Lesson No. 25 – Working Capital- II

Working Capital Assessment lesson no II.

The Bankers follow the following methods for Working Capital assessment.

(A) Turnover Method (Nayak Committee Recommendations)
The finance to following category of borrowers is considered on the basis of
Turnover Method.
i) MSME Borrowers availing fund based facilities up to Rs.5 crores.
ii) Other category of borrowers availing fund based facilities up to Rs. 2.00 crores.

(B) PBF/MPBF /2nd Method as suggested under Tandon Committee / Projected Working Capital Gap Method
Working capital requirements of all borrowers excluding those mentioned at (i) & (ii) are assessed on the basis of projected WC Gap method. (In case of borrowers at (I and ii)above, the working capital limits may be considered under WCG method at the specific request of the borrower.)
(C) Cash Budget System
For Seasonal industries such as sugar, tea etc; Software industry; Sick units; Construction/Contractors/Developers - Cash budget method is used for
assessment of working capital requirements. Separate Peak and Non Peak level Working Capital limits are fixed where
the borrower’s activities are of seasonal nature.
Let us discuss these methods. Remember that Starting point is the Turnover ie Projected Sales.

***** ( A) TURN OVER Method *****

This is a liberalised method of appraisal. Various steps involved under this method are as under.
1.Obtain Projected Turnover (ie Gross Sales inclusive of Excise duties).
2.Assess the Turnover ie Gross Sales projected/estimates are realistic and reasonable.The basis may be a)Statement of accounts. b)Returns filed with Sales Tax/Revenue authorities. c) Other documents.
3.Arrive at Accepted Level of Gross Sales. (The most crucial aspect).
4. GROSS Working Capital= 25% of Gross Sales (3 of above).
5.Margin to be brought in by the Client ; Higher of
a) 5% of Gross Sales (of 4)
b) The available/projected NWC. (CA - CL) as per Balance Sheet.

6. Permissible Bank Finance = Gross WC arrived at 4 (Less) Margin arrived at 5

i) After discussion and based on the past records; studied with the present conditions a Level of Projections of Sales is to be Accepted.
ii) At the cost of repetition I may say that the whole focus is on Sales. As such it should be arrived at taking into considering all the relevent factors/available inputs which will be different for different business/trade/manufacturing/professional activities and places.

Let us discuss a simple real example. M/S Sai Medicals is a medical shop in a town with a population of around 2lakh located near your branch and having a Current Account with u.They were enjoying a OD limit of Rs40,000/- from u against NSC.The turnover for last 3 years was Rs.12 ; 16; 15 lac and Current year 10 months actual s 14, prov sales 20 Lac.They have projected a turnover of Rs.38 lac and applied for a Cash Credit loan of Rs.8 lac.As per Prov B/S for this year , CA= 8 & CL= 6 lacs.
Mr. Thakur, BM sought certain information and asked questions.He got following explaination.
1 The fall in sales in 2nd Year was due to an accident Sai had.
2.Now his son who is studying pharmacy will soon join him.
3 A New multi speciality hospital is coming up and they have tied up.They will provide 7*12 and 24 hours service.
4.They got a status of Distributor for Aurbindo Pharma and likely to get for another pharma company for the Tehasil.
After taking into consideration all aspects BM agreed for a turnover of Rs30 lac.and working for CC limit was following.
a. Accepted Turnover Rs30 lac
b. Gross Working Capital25% of a Rs 7.50 lac
c.The margin to be brought in
i)5% of A= Rs 1.50 lac
ii)Available/projected = 2 lac*
The higher of i & ii. = Rs 2 lac
(*NWC=CA - CL=Rs8 -6 =Rs 2 lac)
d. PBF or BF or Limit sanctioned is = b-c =7.50-2.00= Rs.5.50 lac.
Mohan explained to Sai the whole process and assured him that a review will be taken again if his performance improves than accepted level.The terms and conditions for CC limit were communicated to Sai for completing the formalities.
(Earlier BM had also worked out the following Ratios- NWC;Current ;Turn Over Ratios;Profit and TOL:TNW and found them within parameters.)

Let us close today's discussions.

Please let me know if any additions are required.
@ Class this Lesson as on descending Scale
A. B. C. D.

Good by.

Waman Gokhale

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